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Construction investment in S. Korea needs to be downgraded: report

Xinhua, October 26, 2016 Adjust font size:

Construction investment in South Korea, which has recently led growth of the economy, needs to be downgraded amid rising warnings about bubble collapse in the real estate market, a central bank report said on Wednesday.

Bank of Korea (BOK) economists said in a report that worries emerged about construction investment amid the trend of low birth rate and population aging, urging the need to downgrade the growth rate of construction investment.

South Korea's economic growth has been led mainly by the construction sector. Real gross domestic product (GDP) increased 0.7 percent in the third quarter from three months earlier, with construction investment contributing to raising the increase by 0.6 percentage points.

Investment in the construction sector jumped 11.9 percent in the third quarter from a year earlier, with the growth rate for the first half of this year being set at 10.3 percent.

The construction sector has bolstered the economy as the government eased regulations on mortgage financing and home purchase amid the record-low borrowing costs.

The BOK cut its benchmark interest rate from 3.25 percent in July 2014 to an all-time low of 1.25 percent in June this year. When the 2008 global financial crisis peaked, the bank refrained from lowering the rate below 2 percent.

The lower rate was originally aimed at boosting corporate investment and job creation, but companies were reluctant to hire people and spend capital on concerns about economic uncertainties at home and abroad.

Accommodative monetary policy encouraged surplus capital to flow into the real estate market, increasing home-backed loans that have kept a record-breaking trend.

The widespread trend of purchasing home with borrowed money followed the government's decision to ease regulations on mortgage financing such as loan-to-value (LTV) and debt-to-income (DTI) ratios.

The government removed a ceiling on new apartment prices, which was introduced to curb a real estate bubble, while encouraging the transaction of right to purchase new apartments with a variety of deregulations.

The population aging, which indicates a rising portion of people aged 65 or older, boosted worries about lower home demand and higher home supply as seen in the 1990s in Japan, the period right before the country entered a phase of bubble collapse in the property market.

The BOK report recommended that the country focus more on enhanced efficiency and productivity rather than a quantitative expansion.

Labor productivity in the construction sector, which reflects an added value per person, tumbled 17.9 percent in 2015 compared with the year of 2008. In comparison, productivity among manufacturers soared 14.1 percent in the cited period. Endit